The S&P 500 index has delivered an annual return of about 10% since 1957. That’s close to the growth of a company’s average earnings. If you want to beat the market, you need to look for companies that can grow their earnings well above average.
Here are two companies that could deliver higher earnings growth and outperform the S&P 500 over the next five years.
1.Tesla
Tesla (NASDAQ: TSLA) stocks have returned 8,500% to shareholders over the past 12 years, but the stock has not made new highs since 2021. However, the stock has followed this pattern before. The stock previously delivered modest gains between 2014 and 2018 before rising tenfold to its previous high of $414. Here’s why a new bull run is coming.
Despite higher interest rates and increasing competition in the electric vehicle (EV) market, Tesla delivered a strong second-quarter update, with auto revenue up 14% from the first quarter. Tesla remains one of the most profitable automakers in the world, generating $8.1 billion in adjusted net income over the past four quarters on $95 billion in revenue.
Tesla will emerge from this downturn in a stronger competitive position thanks to its efforts to lower its cost per vehicle. The EV opportunity remains enormous, with annual unit sales expected to more than double over the next four years, according to Statista. By lowering costs, Tesla will remain a formidable leader that can profitably sell more affordable EVs to capture a significant share of the market.
CEO Elon Musk has previously said that he believes Tesla can one day make $1 trillion in profits. That’s a long-term goal, but it shows that management is increasingly investing in initiatives that will boost the company’s margins and drive strong earnings growth over time. Some of those opportunities should emerge over the next five years, such as growing subscriptions for Tesla’s self-driving software, energy solutions and robotaxi service.
Analysts expect Tesla’s profits to nearly double next year, which could be the start of a trend. As auto revenues return to growth and Tesla continues to improve its profit margin, the company could deliver high double-digit earnings growth to support market-beating returns.
2. Spotify technology
Spotify technology (NYSE: SPOT) shares have risen 128% in the past 12 months, driven by growing demand for its premium subscription plans. The company is boosting profits by releasing more content and raising prices, and these moves could generate more market-beating returns for shareholders.
There aren’t many services reporting double-digit revenue growth in this challenging retail environment. But music and podcast listeners clearly value their monthly Spotify subscription. Spotify’s total monthly active users grew 14% year-on-year in Q2 to 626 million.
Spotify is dominating the audio market by expanding into audiobooks and podcasts. The company saw 12% year-over-year growth in premium subscribers in the past quarter, helping to generate more revenue. Most importantly, the company’s content strategy is driving better user retention and leading to better profitability for the platform.
Spotify has recently implemented price increases in certain markets, but the higher rates have resulted in less subscriber churn than the previous price increase. This means that higher rates benefit the bottom line. The company’s operating profit margin was 7% in the second quarter, fully reversing the operating loss from the year-ago quarter, and is expected to continue to grow over the long term.
Analysts expect the company’s adjusted earnings to hit $10.41 per share in 2026, an exponential improvement from negative earnings in the past. With Spotify’s operating margin still relatively low for a subscription service, there could be significant room for further margin improvement and robust earnings growth that could support market-beating returns.
Should You Invest $1,000 in Tesla Now?
Before buying Tesla stock, here’s what to consider:
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John Ballard has positions in Tesla. The Motley Fool has positions in and recommends Spotify Technology and Tesla. The Motley Fool has a disclosure policy.
2 Unstoppable Growth Stocks That Could Crush The S&P 500 Over The Next 5 Years was originally published by The Motley Fool
